Russia tells Washington curbs on its banks would be act of economic war

MOSCOW (Reuters) – Russia warned the United States on Friday it would regard any U.S. move to curb the activities of its banks as a “declaration of economic war” and would retaliate, as new sanctions took their toll on the rouble and U.S. lawmakers threatened more.

The warning, from Prime Minister Dmitry Medvedev, reflects Russian fears over the impact of new restrictions on its economy and assets, including the rouble which has lost nearly six percent of its value this week on sanctions jitters.

Economists expect the Russian economy to grow by 1.8 percent this year. But if new sanctions proposed by Congress and the State Department are implemented in full, which remains uncertain, some economists fear growth could be almost to zero.

President Vladimir Putin discussed what the Kremlin called “possible new unfriendly steps by Washington” with his Security Council on Friday.

Moscow’s strategy of trying to improve battered U.S.-Russia ties by attempting to build bridges with President Donald Trump is backfiring after U.S. lawmakers launched a new sanctions drive last week because they fear Trump is too soft on Russia.

That in turn has piled pressure on Trump to show he is tough on Russia ahead of mid-term elections. The State Department announced new sanctions on Wednesday linked to the poisoning of a former Russian spy in Britain in March.

On Friday, the White House strongly condemned the poisoning incident, which a spokesman for Trump’s National Security Council called “a reckless display of contempt for the universally held norm against chemical weapons”.

The new sanctions pushed the rouble to two-year lows and sparked a wider sell-off over fears Russia was locked in a spiral of never-ending sanctions. Russian Foreign Minister Sergei Lavrov complained about the new sanctions in a phone call on Friday to Secretary of State Mike Pompeo.

Separate U.S. legislation introduced last week in draft form by Republican and Democratic senators, dubbed “the sanctions bill from hell” by one of its backers, proposes curbs on the operations of several state-owned Russian banks in the United States and restrictions on their use of the dollar.

Medvedev, speaking on a trip to Russia’s far east, said: “I can say one thing: If some ban on banks’ operations or on their use of one or another currency follows, it would be possible to clearly call it a declaration of economic war.”

The Russian flag flies over the Embassy of Russia in Washington, U.S., August 6, 2018. REUTERS/Brian Snyder

“And it would be necessary, it would be needed to react to this war economically, politically, or, if needed, by other means. And our American friends need to understand this.”

Pro-Putin lawmaker Vyacheslav Nikonov who in 2016 prompted the Russian parliament to erupt in applause when he announced Trump had won the White House, called for a tough response.

“War is war,” Nikonov wrote on Twitter. “We need to rid ourselves of any dependency on our rival as much as possible and stop helping them. Our response must not just be symmetrical but preventative. We need to respond now and toughly.”

FEW GOOD RETALIATORY OPTIONS

In practise however, there is little Russia can do to hit back at the United States without damaging its own economy. Officials in Moscow have made clear they do not want to get drawn into what they describe as a mutually-damaging tit-for-tat sanctions war.

The threat of more U.S. sanctions kept the rouble under pressure on Friday, sending it crashing to its lowest level since June 2016 before it recouped some losses.

“The Russian currency has been caught in a perfect storm of weakening crude oil prices and the new U.S. sanctions, in addition to the threat of even tougher punitive measures in the coming months,” said Lilit Gevorgyan, economist at IHS Markit.

The Russian central bank said the rouble’s fall to multi-month lows on news of new U.S. sanctions was a “natural reaction” and that it had the necessary tools to prevent any threat to financial stability.

Central bank data showed on Friday it had started buying less foreign currency on Wednesday, the first day of the rouble’s slide, to try to tamp down volatility.

Analysts doubt, however, that the authorities will take much action to support the falling rouble, as they decided not to intervene during a similar sell-off in April, which was also driven by U.S. sanctions.

The fate of the U.S. bill that would tighten sanctions much further is not certain. The full U.S. Congress will not be back in Washington until September, and congressional aides said they did not expect the measure to pass in its entirety.

While it was difficult to assess so far in advance, they said it was more likely that only some of its provisions would be included as amendments in another piece of legislation, such as a spending bill Congress must pass before Sept. 30 to prevent a government shutdown.

Additional reporting by Tom Balmforth in Moscow and Patricia Zengerle in Washington Writing by Andrew Osborn; Editing by William Maclean and Peter Graff

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